Essential Mortgage Terms
Every industry has its own language and terms. These words and phrases can be confusing to anyone who is not part of the daily operations of a specific sector, and the mortgage business is no exception.
So, to help you understand the terms, acronyms, and phrases regularly used when working with a mortgage broker, Nancy Tychowski, Mortgage Consultant, has created this handy reference guide. Here you’ll find valuable information allowing you to comprehend and communicate your mortgage needs effectively.
Variable Rate Mortgage (VRM): When interest rates change, your mortgage payment will typically stay the same.
Adjustable Rate Mortgage (ARM): Unlike variable rates, your mortgage payment will change when interest rates change.
Trigger Rate: When interest rates increase to the point that regular principal and interest payments no longer cover the interest charged, the interest gets deferred, and the principal balance (total cost) can increase until it hits the trigger point.
Trigger Point: When the outstanding principal amount (including any deferred interest) exceeds the original principal amount. The lender will notify the customer of how much the principal amount exceeds the excess (Trigger Point). The client typically has thirty days to make a lump sum payment, increase the amount of the principal and interest payment, or convert to a fixed rate term.
Amortization Period: This is the number of years it will take to repay the entire mortgage fully and is determined when you are approved. A more extended amortization period will result in lower payments but more interest overall as it will take longer to pay off. The typical amortization range is fifteen to thirty years.
Closed Mortgage: This is any mortgage where you have agreed to pay the lender for a specified period. It means you cannot pay it off, refinance or renegotiate before the mortgage term ends without incurring a penalty. Depending on the lender, there may be options for accelerated payments, but it depends on your particular mortgage contract. While these mortgages tend to be stricter, they can often provide lower interest rates.
Conventional Mortgage: In the case of a traditional mortgage, the loan covers no more than 80% of the property’s purchase price. It means the buyer has put 20% (or more) down on the property. These mortgages don’t require default insurance due to the amount being put down.
Down: It’s short for ‘down payment.’ In Canada, the minimum down payment is 5% on any home purchase.
Fixed: A fixed-rate mortgage means you get locked in at the interest rate agreed upon for longer.
High-Ratio Mortgage: A high-ratio mortgage is where the buyer has provided a down payment of less than 20% of the purchase price and needs to pay Canada Mortgage and Housing Corp. (CMHC) to insure the mortgage against default.
Open Mortgage: An open mortgage means you can pay out the balance at any time without receiving a penalty.
PIT (Principal, interest, and taxes): A calculation representing the amount you can afford to pay monthly on your home. Heating costs often get included in this calculation (PITH).
Term: It’s the length of time that a mortgage agreement exists between you and the lender. Rates and payments vary with the length of the term. The most common term is five years, but it can be anywhere from one to ten years. Generally, a longer term will come at a higher rate due to the added security.
Variable: A variable rate is an interest rate that is adjusted periodically to reflect market conditions.
Default: Failure to pay your mortgage on time will result in defaulting on the loan.
Get in touch with me today!
We hope these terms made you feel more confident about working with a mortgage broker. If you’re looking for a licensed mortgage broker in Burnaby, British Columbia, reach out to Nancy Tychowski, Mortgage Consultant. With many years of experience in banking and financial compliance, I strive to offer analytical and professional mortgage services.
I specialize in mortgage pre-approval, debt consolidation, home equity line of credit, second mortgages, and more. I offer my services across Chilliwack, Coquitlam, Mission, Kelowna, Kamloops, Burnaby, Richmond, Victoria, Nanaimo, Abbotsford, Surrey, Langley, West Vancouver, North Vancouver, Vancouver, and the surrounding areas of British Columbia.